Hi TaxGuru,

I looked on some similar threads, but couldn't find all my answers so thought I would share my specific details and questions here. Sorry if you have answered these before.

We bought a small city condo in 2007 and lived there as our primary residence for five years. At the end of June 2013 we bought a new house in a different state and currently reside there full-time. Beginning in July 2013, right after we moved out, we rented out the small city condo for $1700 per month, giving us $10,200 in rental income for the year. I am filing as a cash basis taxpayer. Here are my questions:

#1. I replaced the hot water heater in January 2013 in anticipation of renting later that year. Even though the repair took place when I was living there, can I still deduct is as a repair expense on my Schedule E? I also have several other repair expenses, but they were incurred while the tenants were living there.
#2. I incurred mortgage interest expense and property taxes both as my primary residence (for 6 months) and as a landlord (also 6 months). Do I deduct ALL my 2013 mortgage interest and taxes as expenses on Schedule E? OR do I pro-rate these costs and deduct some on Schedule E (as landlord) and some on my Schedule A (as primary resident)?
#2a. If I deduct ALL mortgage interest and taxes on my Schedule E, I come out with a loss since I only received 6 months worth of rental income. If I do generate a loss, can I carry forward this loss to next year?
#3. I'm a little lost on how to value my property when it comes to depreciation. I initially purchased the condo for $300k back in 2007. I was planning to use that for basis. A identical unit to mine sold recently for $375k (sweet!) - should I use a more current fair market value for depreciation? Can I even deduct depreciation this year?
#4. I pay a single condo fee to our condo management company each month. I'm aware that it goes to pay many things such as insurance, utilities, cleaning & maintenance, management fees, plowing, etc. Can I just lump this all under "management fees" on my Schedule E or do I really need to drill down and break this out? How would I treat items such as building reserve fund contribution?
Thanks!

#1;note;I understand that lenders penalize you if the house you buy is not your primary residence. Lenders do offer better terms to home-buyers who view the home as their primary residence. They have found that when borrowers have financial trouble, they will struggle harder to save their primary residence than a vacation home, or a property held as an investment.The loan application asks whether you intend to occupy the property as your primary residence. Bon fide occupancy is defined as occupying within 30 days of loan closing and remaining for at least a year. But occupancy itself is not defined. It certainly doesn't mean that you have to be physically present in the house most of the time, or even much of the time. For those who intend to be absent much of the time, as in your case, I would think the critical test is whether the house will be rented in your absence. Since you do intend to rent it, and you do not intend to retire there, I would say that you do not meet the test as a primary residence for the home in small city, the I guess your primary home may be the new home.if you sold it as rental or investment real estate at a loss, you may be able to deduct that loss from your taxes. If you sold your personal residence at a loss, that loss is not deductible. For the loss on the sale to be tax deductible, the real estate had to be held to produce rental income or a capital gain. The property could not be held for personal use.however, if you later covert it back to residential, then, You may qualify to exclude from your income ALL or PART of any gain from the sale of your MAIN HOME. Exclude up to $250k, $500k if married, from taxes if you meet the Primary Residence Exclusion requirements!



#2;I guess it depends; The IRS considers a water heater a major home improvement. as you are a homeowner and invest in a new water heater, the IRS will give you a tax deduction or credit depending on the type and energy efficiency of the equipment. Tax deductions reduce your agi while tax credits reduce your taxes dollar for dollar. Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.youcan directly deduct repair exp on Sch E of 1040 in the year incurred.so, you must separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property.Many states also offer tax incentives for specific types of water heater purchases.




#3;I assume that the rental pty is rented out for 365days, then, UNLESS you used it for personal purposes, you do not need to prorate the costs and you can deduct them on Sch E of 1040.aslongas the costs on Sch E exceeds rental income, then it is ncarried forward as passive losses unless you are a r/e pro/dealer. You have a rental loss if all the operating expenses from a rental property you own exceed the annual rent and other money you receive from the property. Rental losses are always classified as "passive losses" for tax purposes. This greatly limits your ability to deduct them because passive losses can only be used to offset passive income. They can't be deducted from income you earn from a job or investments such as stock or savings accounts. Without passive income, your rental losses become suspended losses you can't deduct until you have sufficient passive income in a future year or sell the property to an unrelated party. You may not be able to deduct such losses for years.




#4. Correct as mentioned above.


#5. No; An asset's depreciation basis is the starting point for determining its monthly or quarterly depreciation expense. An asset's basis is increased by the cost. An asset's initial basis depends on how the asset was acquired.

your depreciable basis is ALWAYS your adjusted basis, Imean your original cost $300K plus any capital improvements added UNLESS you receive the pty as a gift; There is no one formula for computing an asset's depreciable basis. It is not necessarily its fair market value and it is not its replacement cost. While an asset's basis is increased by the cost of any freight, installation and improvements (but not repairs) as said.

#6;yes aslong as it is used as rental pty you can claim annual depre on your Sch E to cut your taxable rental incomne;however, on the disposition of the rental pty, you MUST recapture the unrecaptured depre and the recap depre ;d be taxed at ordinary tax rate 25% UNLESS your marginal tax rAte ‘d be lowr than 25%.



#7;Generally, fees and expenses incurred as part of owning rental property are tax deductible. If you don't live in the property but routinely rent out the condo, the IRS normally treats condo fees, association fees and other mandatory expenses as ordinary business expenses.

#8;same as above as for major repairs and replacement of common elements